DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 1(1)(2), BANGALORE vs. M/S. BPL LIMITED, BANGALORE

The grounds raised by the Revenue reads as follows:

The assessee is a company engaged in the manufacturing and trading of high-quality electronics products such as TV, Refrigerators, AC, etc. As

The assessee, a listed entity, was a pioneer in electronic goods and still has high Brand recall. Due to various reason, the company lost market share and incurred losses for the past many years. It had obtained a Corporate Debt Restructuring approved by the courts and based on the said order, liquidated its assets and paid off its secured lenders over a period of time. However, the balance sheet was burdened with accumulated loss. With a view to reflect the correct financial position, it approached the High Court of Kerala with a scheme of arrangement, whereby the accumulated loss was to be set off against Share premium amount reflected in the books of accounts. Based on the said order, the Share premium was set off against the loss and so reflected in the financials for the year ending 31.3.2016.

The assessee filed its return of income for Assessment Year 2016-17, declaring total income of Rs.36,80,828/- under the head “Income from House Property”. The assessee had sold its properties at Delhi and Bengaluru and derives Long Term Capital Gain (LTCG) of Rs.14,88,16,483/-. The assessee had Long Term Capital Loss (LTCL) of Rs.27,55,73,246/- carried forward from Assessment Year 2013-14. The assessee set off LTCL against LTCG and claimed carried forward of LTCL remaining unabsorbed.

The AO observed that write off of investments is a colourable device. According to the AO, the Hon’ble Kerala High Court allowed the loss in the books of accounts that remained to be set off against share premium A/c and therefore the said loss will no longer be available for set off.

The CIT(A) upheld the plea of the assessee and he held that LTCL that was determined as per the Act in earlier Assessment Year will be available for set off and the order of Hon’ble Kerala High Court setting off

He held that the assessee’s claim of LTCL on sale of investments, had been scrutinised by the AO, year after year and for the Asst. year 2012- 13, the said loss was determined consequent to the appellate order received in the case by passing an Order U/Section 143(3) rws 254 of the Act. Thus, the business loss and the Long Term capital loss determined in the case of the assessee are valid and determined by the successive AO's based on the examination of the facts in the scrutiny orders.

He held that the AO, without any material evidence, has given a finding that the assessee’s claim of long-term capital loss is a colourable device to avoid payment of capital gains without taking any proper remedial action for the relevant Asst. yeas for which the said losses pertain to. If at all the AO had any doubt about the genuineness of the said loss claim of the appellant, the proper course of action is to re-open the said assessments for the purpose of determination of the allowable losses. However, the AO, without any said due process, had simply assumed the claim to be a sham transaction, which is highly improper. The claims of losses pertaining to various years commencing from the Asst. year 2008-09 to 2013-14 are in respect of several transactions independently undertaken by the assessee, which have to be examined on record, to establish that they were sham. Accordingly, the CIT(A) directed the AO to undertake the exercise by scrutinising the final orders passed in respect of the previous years as per the available records and allow the claim of the assessee for set off.

After considering the rival submissions, we are of the view that the order of the CIT(A) does not call for any interference. As right held by the CIT(A), the corporate restructuring and the consequent reduction in the accumulated losses by setting it off against share premium account reflected in the books of account will have no effect whatsoever in so far as the claim for set off of brought forward loss under the Act made by assessee. Moreover the finding of the AO that the assessee adopted colourable devise has also been rightly held to be without any basis by the CIT(A). It has not been brought out on record that by reason of the restructuring the books and the order of the Hon’ble Kerala High Court, the assessee is precluded from utilizing the carryforward LTCL against set off of LTCG in future years as contemplated by section 74 of the Act. In such a scenario, we are of the view that the set off was rightly directed to be allowed by the CIT(A). Consequently, the order of the CIT(A) on this issue is upheld and ground Nos.2 and 3 raised by the Revenue are dismissed.

As far as ground Nos.4 to 6 raised by the assessee is concerned, the facts are that the assessee was due and payable a sum of Rs.11,61,171/- to a creditor M/s. Anushka Business Consulting and a sum of Rs.22,02,920/- to M/s. Kasturi Associates. The AO found that these balances remain outstanding in the books of the assessee and the assessee did not have transactions with these 2 creditors for many years. The AO found that there was no payment made from 2018. The AO was of the view that the

Before CIT(A), the assessee submitted that the liabilities reflected in the balance sheet cannot be treated as cessation of liabilities. Merely because the liabilities are outstanding for last many years, it cannot be inferred that the said liabilities have ceased to exist. It is also a fact that the assessee has not written off the outstanding liabilities in the books of account and the outstanding liabilities are still in existence would prove that the assessee acknowledged his liabilities as per the books of account. Section 41(1) of the Act is attracted when there is cessation or remission of a trading liability. The AO shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof. Merely because the assessee obtained benefit of deduction in the earlier years and balances are carried forward in the subsequent year, would not prove that the trading liabilities of the assessee have become non-existent. If a Trading Liability is being shown by an assessee in his books for years it cannot be considered as ceased merely because of the facts that it is being shown for years and the assessee is unable to provide confirmation from the editors or other details from the creditors or the possibility of creditors demanding their money back is minimal.

The CIT(A), after considering the submissions, deleted the additions made by the AO. The CIT(A) held as follows:

The CIT(A) also relied on the decision of the Hon’ble High Court in the case of Alwaris and Thomas (2016) 69 taxmann.com 257 (Karnataka) wherein the Hon’ble High Court held that merely because creditor could not be traced on date when verification was made that may not be a ground to conclude that there was cessation of liability because cessation of liability has to be cessation in law of debt to be paid by assessee to creditor.

In the result, appeal of the Revenue is dismissed.